issuance of shares &debentures
A company needs cash to start a business to get the cash it either;
loan or 2. issue shares
LOANS:
loan from bank-- bank pays a sum of money to startup business and
company has to return after a certain time period with interest.
loan from general public--- issues debentures.. debenture holders
are not the owner of company , the company has to pay the
amount back to them after a certain time period.
ISSUE OF SHARES:
Shares are issued to general public in stock exchange and
shareholders becomes owner of a company.
SHARES: total capital of company divided into smaller units known
as shares.
SHARE CAPITAL: in case of company capital is collected from
general public by issuance of shares and this capital is known as
share capital.
TYPES OF CAPITAL:
1.AUTHORISED CAPITAL/ REGISTERED CAPITAL:
Total capital of company which it can issue by
means of shares to general public.
2. ISSUED CAPITAL:
the capital which a company issues to general public.
3. PAID UP CAPITAL:
The capital which the general public purchased.
4. CALLED UP CAPITAL:
purchase of shares on account.
PROCESS OF ISSUANCE OF SHARES:
-- first company offers shares to general public through bank the
interested parties submit share application in bank along with sum
of money.
-- If share applications received equals the shares offered then it is
known as EQUAL SUBSCRIPTION.
Entries:
1.bank dr xxx
share application cr xxx (money received along with
applications through bank)
2. share application dr xxx
share capital cr xxx ( finalization of application
and allotment of shares)
--If share applications received exceeds shares offered then it will
be known as OVER SUBSCRIPTION. and the excess amount will be
refunded to applicants.
Entries:
1.bank dr xxx
share application cr xxx (money received...)
2. share application dr xxx
share capital cr xxx ( finalization....)
3. share application dr xxx
bank cr xxx ( refund of excess money)
--If share application received are less than shares offered then in
this case it is known as UNDER SUBSCRIPTION and the remaining
shares will be purchased by underwriter.
Entries:
bank dr xxx
share applications cr xxx ( money received....)
2. share application dr xxx
share capital cr xxx (finalization...)
3. bank dr xxx
share capital cr xxx ( shares issued to underwriter)
EXAMPLE QUESTION:
1.Waseem and co. issued 10000 shares to public but company
received application for 12000 shares @ 10 each. company
accepted 10000 shares.
req. make entries.
2. Naeem &co. issued 60000 shares of rs. 10 each but co. received
applications for 50000 shares. the remaining shares were
purchased by underwriter.
req. prepare entries
ISSUE OF SHARES MAYBE;
1.for cash
2.for consideration other than cash;
-in consideration of service rendered
-in consideration of assets acquired
-in consideration of running business.
- In consideration of liability.
ISSUE PRICE:
At par : shares issued at face value of shares.
At premium: shares issued at price above par/face value.
At discount: shares issued at price below par value.
CASE 1: ISSUE FOR CASH:
Entries:
1.bank dr xxx
share application cr xxx (money received with share
application.)
2. .AT PAR:
Share application dr xxx
share capital cr xxx ( shares issued at par)
. AT PREMIUM:
share application dr xxx
share capital cr xxx
share premium cr xxx (shares issued at premium)
.AT DISCOUNT;
share application dr xxx
share discount dr xxx
share capital cr xxx (shares issued at
discount)
3. SAME REFUND OR UNDERWRITER ENTRY.
EXAMPLE:
Q1. 20000 shares application received.
18000 shares were allotted, par value is RS. 10 each.
2000 share applications were refunded to applicants.
req:
pass general entries on each of following cases;
-at rs. 10 each
-at rs. 12 each
-at rs. 7 each
CASE 2; issue for consideration in service:
Entries
AT PAR;
Preliminary expense dr xxx
ord. share capital cr xxx
. AT PREMIUM;
Preliminary exp dr xxx
ord. share capital cr xxx
share premium cr xxx
AT DISCOUNT:
preliminary exp dr xxx
share discount dr xxx
ord. share capital cr xxx
EXAMPLE:
Q2. 1000 shares issued at par to promoters against their services.
CASE 3: ISSUE AGAINST FIXED ASSETS:
Entries;
AT PAR:
asset a/c dr xxx
ord. share capital cr xxx
AT PREMIUM
asset a/c dr xxx
ord. share capital cr xxx
share premium cr xxx
AT DISCOUNT:
asset a/c dr xxx
share discount dr xxx
ord. share capital cr xxx
EXAMPLE
Q3. william co. purchased equipment by issuing 12000 .shares of
RS. 10 each at RS. 12
CASE 4: ISSUE IN CONSIDERATION OF running business:
Entries;
1.asset a/c dr xxx
vendor's payable a/c cr xxx
LIABILITY CR XXX
2. vendor's payale a/c dr xxx
ord. share capital cr xxx
EXAMPLE:
Al habibi co acquires the assets and liabilities of a firm mirza &
mirza on nov 30, 2020. the agreed value on that date were as
follows.
al habibi co issued 60000 shares at Rs. 10 each.
CASE 5: ISSUE FOR CONSIDERATION IN LAIBILITY:
Entries:
AT PAR :
long term liability dr. xxx
share capital cr xxx
AT PREMIUM:
Long term liability dr xxx
share capital cr xxx
share premium cr xxx
AT DISCOUNT;
Long term liability dr xxx
share discount dr xxx
share capital cr xxx
EXAMPLE QUESTION:
Q5. 5% Debentures amounting to RS. 500000 has been converted
into share capital by issue of 40000 ordinary shares of RS.10 each
in full settlement of 5% debentures.
ISSUE AND REDEMPTION OF DEBENTURES.
DEBENTURES:
loan made to company by general public.
debenture holder is creditor of the company.
interest on debentures is a charge against profit.
ISSUE OF DEENTURES:
FOR CASH
FOR CONSIDERATION OTHER THAN CASH.
ISSUE FOR CASH:
It consists of 5 cases:
1. issued at par' redemption at par
2. issued at discount , redemption at par
3. issued at premium , redemption at par
4. issued at par' redemption at premium
5. issued at discount, redemption at premium
CASE 1: ISSUED AT PAR, REDEMPTION AT PAR:
ENTRY;
bank dr xxx
debenture a/c cr xxx
CASE 2: ISSUED AT DISCOUNT, REDEMPTION AT PAR:
ENTRY;
bank dr xxx
discount on debenture dr xxx
debenture a/c cr xxx
CASE 3: ISSUED AT PREMIUM, REDEMPTION AT PAR:
ENTRY:
bank dr xxx
debenture a/c cr xxx
premium on debenture cr xxx
CASE 4: ISSUED AT PAR, REDEMPTION AT PREMIUM:
ENTRY:
bank dr xxx
loss on issue of debenture dr xxx
debenture a/c cr xxx
premium on redemption cr xxx
CASE 5: ISSUED AT DISCOUNT REDEMPTION AT PREMIUM:
ENTRY:
bank dr xxx
discount on issue of debenture dr xxx
loss on issue of debenture dr xxx
debenture a/c cr xxx
premium on redemption cr xxx
issue case:
credit-debenture a/c is always recorded on par value * no of
debentures.
credit-share capital a/c is always recorded on par value * no of
shares.
ENTRIES FOR REDEMPTION: ( repayment)
CASE 1: ISSUED AT PAR, DISCOUNT OR PREMIUM BUT
REDEMPTION AT PAR:
Debenture dr xxx
bank cr xxx
CASE 2: ISSUED AT PAR OR DISCOUNT, REDEMPTION AT
PREMIUM:
Debenture dr xxx
premium on redemption dr xxx
bankcr xxx
ISSUE OF DEBENTURES OTHER THAN CASH:
ENTRY:
ASSET DR XXX
VENDOR A/C CR XXX
AT PAR:
VENDOR A/C CR XXX
DEBENTURE A/C CR XXX
AT DISCOUNT:
VENDOR DR XXX
DISCOUNT ON ISSUE OF DEBENTURE DR XXX
DEBENTURE CR XXX
AT PREMIUM:
VENDOR A/C DR XXX
DEBENTURE A/C CR XXX
PREMIUM ON ISSUE OF DEBENTURE CR XXX
DEBENTURE INTEREST:
DEBENTURE EXP DR. XXX
DEBENTURE INTEREST PAYABLE CR XXX
DEBENTURE INTEREST PAYABLE DR. XXX
BANK/CASH CR XXX
BALANCE SHEET:
